Dec. 29 (Bloomberg) -- South Africa’s rand rose to its strongest level in 2 ½ months against the dollar after the price of gold climbed to an 11-week high as mounting tension in the Middle East boosted the appeal of the metal as a safe haven asset.

Gold, which rivals platinum as South Africa’s biggest export earner, climbed to the highest level since Oct. 10 after Israel expanded its bombing of the Hamas-controlled Gaza Strip. The attacks raised concern oil supplies from the Middle East, which produces almost a third of the world’s crude, may be disrupted, prompting investors to purchase gold as a hedge against inflation.

“There’s quite a strong correlation between the rand and the gold price, and that’s helping the currency in a thinly traded market,” said Kimon Boyiatjis, a hedge-fund manager in Cape Town at Trident Capital. “South Africa is one of the world’s biggest gold producers, so a stronger bullion price is very positive for us from an export point of view.”

The rand advanced as much as 3.1 percent to 9.4175 per dollar, the strongest level since Oct. 15. It traded at 9.4433 as of 4:24 p.m. in Johannesburg from 9.7150 at the end of last week. It also strengthened versus 15 of the 16 most-actively traded currencies monitored by Bloomberg, adding most against the Brazilian real. It strengthened 1 percent against the euro to 13.4945.

March Record

The currency may strengthen to between 9 and 8.60 per dollar “pretty swiftly,” according to Boyiatjis.

Gold for immediate delivery gained as much as 2.4 percent to $890.49 an ounce as Israel massed tanks near the coastal enclave of Gaza and authorized the call-up of 7,000 army reservists, raising concern it may launch a ground invasion of the territory. Bullion, which reached a record $1,032.70 an ounce in March, rose 3.7 percent last week, the third straight weekly advance.

South Africa produces about 10 percent of the world’s gold, typically causing the rand to move in tandem with the metal’s price. The nation’s benchmark FTSE/JSE Africa All Share Index of stocks climbed the most since Dec. 17, adding 1.4 percent as shares in mining companies advanced.

Today’s gains pared the rand’s decline against the U.S. currency this year to about 28 percent as foreign investors sold about 73 billion rand ($7.6 billion) more than they bought of South African assets amid the worst financial crisis since the Great Depression, data from the country’s stock and bond exchanges show.

Government bonds were mixed, with the yield on the benchmark 13.5 percent security due September 2015 rising less than 1 basis point to 7.28 percent. The yield on the 13 percent note maturing in August 2010 declined 2 basis points to 7.36 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

Last Updated: December 29, 2008 09:35 EST